Markets @ Bidvest Bank - 30 June 2014

Fundamentals:

US
• It is believed that the US Justice Department will today announce a settlement with BNP Paribas of nearly $9.0bn over alleged sanctions violations. Reuters reports that the settlement may also include a temporary ban on some US dollar clearing business. Not surprisingly, BNP plans to cut its dividend and raising capital through bond auctions to meet the fine.
• Bank of NY Mellon has been ordered to pay back the money paid to it by the Argentinean government as a US judge on Friday described the payment as an “explosive action” that would not be permitted. The money paid to Bank of NY Mellon was only intended for bond holders who had restructured their Argentinean bond holdings. The “holdout” bond holders would have been prejudiced.
UK:
• In the way of data this morning the money supply and credit data continues to point to a fairly subdued credit environment while mortgage approvals remain on a downward path. Approvals have been on the slide for much of 2014 and indications are that the banks will continue tightening their lending criteria. Money supply growth meanwhile continues to contract, all of which should help support the GBP over the medium term.
• Some interesting information from the latest CBI/PwC quarterly survey shows that financial services firms recorded a net decline in profits in the three months to June. Such a performance means that these companies will experience increased price pressures in the months ahead.
Asia:
• Output growth in industrial production fell short of expectations in May, falling to 0.8% y/y vs. 3.8% y/y in April, preliminary data show. On a monthly basis, production recovered partially to expand 0.5% after the sales tax hike culminated in a 2.8% contraction in April. Annual vehicle production growth rebounded to 6.1% in May vs. an August low of 3.4% y/y in April. The data suggests that the sales tax hike only temporarily exerted pressure, yet it remains to be seen whether economic activity will gain meaningful traction.
• Q2 is drawing to a close and the TOPIX was headed for its strongest monthly performance since November, up 4.8% to swing quarterly losses into gains of roughly 4.7%. This follows a 7.9% contraction in Q1 and suggests that investors see the economic soft patch ta present as temporary.
EU:
• Preliminary CPI data for the EZ was in focus today after last week’s initial German release posted a strong topside surprise. The ECB has been anticipating a bottoming of the downtrend in inflation with the help of a bump in energy prices, and should this unfold it could help to contain dovish expectations for the remainder of the year. The subdued cyclical environment in the Zone is ultimately still set to bias a broadly disinflationary environ for the foreseeable future, and the downside risks to growth and potential for deflation from this will keep the Bank’s dovish stance intact.
• In this regard the latest money and credit metrics also out today continue to reflect the trends of lending to the private sector still being in contraction while broad money growth is persisting at very subdued rates.

Developments worth noting:
• It was a quiet end to the week on the international data front but not so for the dollar which is now experiencing stronger pressures from both major and EM currencies alike alongside falling US Treasury yields. Though quite historical at this stage, the revised US Q1 GDP data and consumption data to follow has been softer than originally anticipated and sets the stage for a more cautious Fed outlook on growth. It will put added pressure on the US data to release this week which is arguably the most significant of the month as we see the forward-looking ISM manufacturing and services PMIs in conjunction with Jun non-farm payrolls. Headline payrolls have shown some signs of improvement but qualitative downfalls imply no great pull on Fed interest rate policy.
• The data will be interesting to note when released against the backdrop of the BIS urging central banks to raise interest rates to counteract looming economic imbalances and crisis. The BIS 2014 annual report, released yesterday, warned of risks in normalising rates too late and too gradually and if a stronger move on policy is required later on that this will intensify the potential of the bust. These risks are not only central to the major economies in which we have seen historically loose monetary policy and QE, but also EMs which are typically the most highly exposed to a turn in aggregate demand and investor sentiment.
• The SARB is already seen as a laggard in the EM space which in part has been the reason why the rand has suffered a fragile status for some time now. Though another hike from the SARB remains on the cards, continuing to run negative or near-zero real interest rate policy does not suffice in helping to restore balance in the long-term in promoting savings and leveraging off these savings rather than off debt. Even in low interest rate conditions, SARB policy is not actively encouraging household credit extension anyway when consumers continue to be burdened by high inflation and unemployment. There are also worrying signs of political pressure playing a stronger role across EMs in their monetary policy objectives with the latest being Turkey to cut rates again and such a scenario of a short-lived, shallow hike cycle followed by growth-induced cuts not ruled out for SA as well.
Data/Events for the next week:
• It is a packed week of SA data where the money supply and PSCE data released this morning, which remained indicative of a subdued credit environment given pressure on household finances, will be followed by May trade and government budget data later today. The trade deficit is expected to remain wide on account of sluggish export traction and rising risks to the oil component of imports. Following this will be the Kagiso PMI, Naamsa vehicle sales and BER consumer confidence in the next two days, with productive sector growth still impacted negatively by demand factors and the strikes.
• Offshore there is a range of final PMI readings to take note of but the most important will be the US ISM manufacturing and services PMIs as a gauge for recovery potential post a heavily downwardly revised Q1 GDP figure. Also on the radar is the non-farm payrolls release as an integral factor in the Fed’s policy decisions.

Trade Weighted ZAR:

• The SARB’s new trade-weighted methodology will be effective from tomorrow, the start of July, the bank now using foreign trade statistics from the 2010-2012 period as opposed to the former 2003-2005 data. The magnitude of the revisions is significant and sees many emerging market peers enter into the calculation. It provides a more representative view on the rand’s trade-weighted standing and one factor that is interesting to note as a result is that the rand by these measures is not as weak year-to-date as it was under the old methodology, likely due to its EM peers having trended in a similar direction in an environment where offshore policy continues to be a major driver.
• Using the new methodology, the trade-weighted rand is now sitting 0.4% and 0.8% weaker on a month- and year-to-date basis respectively. This compares with a year-to-date depreciation of 0.6% the same time last week. Gains made against the USD, which have resulted from recent softness in the US data, have been more than offset by losses against the likes of the EUR, CNY and JPY and this is despite risk sentiment for the most part having benefitted EM currencies quite broadly over this time.
• It is concerning that the rand has failed to gain traction so shortly after data showing the Q1 current account deficit narrowing and given an end to the nearly half-year long platinum sector strike. It suggests that there is some doubt as to the sustainability of the current account improvement, with risk in this regard to be further alluded to by the trade data due later today, as well as the latest news of strike action beginning this week in the metals and engineering industries by Numsa. This provides the sense that rand fragilities have not significantly lessened which will remain the case under loose monetary policy conditions.

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